Earnings Call: Q4 2020

Feb 18, 2021

The conference is now being recorded. Welcome to the conference call regarding the publication of Genesheimer AG's Annual Results 2020. At the moment, all participants have been placed on a listen only note. The floor will be open for questions following the presentation. Now I hand over to Ms. Carolyn Nardilo, Head of Investor Relations at Gellertheimer AG. Hello, everybody, and a warm welcome from my side. Thank you for joining us Today to review our Q4 and annual results for the financial year 2020. With me today are Dietmar Simson, our CEO as well as Doctor. Bernd Metzner, our We will start a little bit different today by showing a short video highlighting our financial results twenty 20. And afterwards, we will, as usual, show our set of slides to accompany the management's notes, followed by the Q and A session. Please note this call is being webcast live and will be filed on our website too. Before we start, I have to remind you that the presentations and discussions call. And now it's my pleasure to start our short video and then turn the call over to Dietmar. Thank Yes. I was almost to say thank you, Carolyn. But Good afternoon, ladies and gentlemen, and good morning to those of you joining us from overseas, and welcome to our Q4 and fiscal year 2020 conference call. I'm pleased to have you in this call today, and I hope everybody is healthy. Yes? Innovation in all areas of the company, I hope you liked the video. I could now of course say nothing to add, which would be extremely efficient, but too many things happened 2020. The Gernitheimer team has delivered an outstanding performance and successful managing the challenges All plants worldwide are running and ensuring reliable deliveries to our customers. We added new capacities for the COVID virus and unaffected by the crisis, we continuously focused on It is coming up and accelerating on future growth potentials. This lays the foundation for our future success. We are More often from us in the next 30 minutes. With this, I would like to come to the key takeaways for In particular, it is important for me to underline that Ganesheimer is on a growth track. We have reached Our top line guidance on group level at the lower end of the mid single digit range. Our core business, which Comprises the division Plastic and Devices as well as Primary Packaging Glass achieved an organic growth rate of 3.8% With regards to the adjusted EBITDA margin amounting to 21.9%, we even The Q4 itself has been the best quarter in Gannesheimer's history with Strong growth contribution from our core businesses. We see this as a starting point where investments into innovation starts paying off and where we clearly see that the transformation of our company turns in. Our dividend proposal, which is now €1.25 the 10th dividend increase in a row. Ladies and gentlemen, 2020, we made another big step forward in the transformation process for our Notwithstanding the pandemic, we pushed forward this transformation and the implementation of our And reached several milestones bringing our Gerasimer step by step to another level. Knowing that the transformation is not At the beginning of our financial year 2020, I told you above about 3 key priorities. The most important and relevant focus, secure business continuity. We are and we will be the reliable partner for the Pharma and Healthcare Industry and we will deliver our products with highest reliability, highest quality and in time for Our customers and patients worldwide. What we clearly see, our global footprint pays All our plants, 37 production sites in 14 countries maintained full production. And this was Not as easy as it sounds considering the temporary very challenging situations we were facing in countries as India, Mexico or Brazil. But our global pandemic plans and measures worked out well without any meaningful Any adjustments, no doubt. I personally would have rather seen the result in the center of the range, but we made it. We made it in And the team did very We secured important new contracts with new customers and we won new lead contracts with existing customers. We established New relationships with several of the top biologic companies around the globe. We increased our cost customer orientation focusing on the customer Even more than today, the go to partner for our customers innovating for a better life. The Our team is on a mission. Transforming our Garesheimer into a growth company as innovation leader and solution provider, this is the core of our Strategy Process Formula G. As partner of choice for the pharma and biotech as well as the healthcare industry in general, we Demand for global players with global and also regional footprint throughout the whole pharma value chain is accretive. We are also Seeing a broader access to healthcare in emerging markets and the focus on vaccinations will expand clearly We see challenges, but also opportunities in higher and tighter regulations. And a dominant factor of future health care systems are the increasing costs that are and will further become globally one of the biggest Furthermore, the increasing importance of biologics and biosimilar drugs is relevant for us and provides Biotech is a highly promising market for Ganesheimer. We see strong growth potential In the market for injectables in general, while the market for small molecules will remain strong, we see even larger growth potentials for The fast growing biologics, the biologic sector will offer significant growth opportunities and we will We developed a very strong vision. Where do we want our company to be in 2028? How We will be leading in health and well-being delivery solutions is the vision we developed. To Growth is key. We will bring Gannesheimer on a path for sustainable profitable growth, and we want to speed This includes, of course, the product excellence, but it goes beyond the internal processes as well The cultural change in the company is a core element of the strategy and is fully ongoing. And Ability has to be a core element of it. We set ourselves ambitious goals defining key priorities and targets for Sustainability, clearly beyond the need to fulfill requirements or let me call it checking the box. As you can see, sustainability is the 5th pillar of our strategy process, Formula G. And therefore, it is targets clearly supporting our customers achieving their own sustainability targets and turning today is strong and very competitive in its existing markets and has attractive and During the current pandemic, in order to significantly outperform market growth, we are now focusing It is to grow into these segments. Further global expansion is an important element within this direction. And we Our footprint in the primary plastic packaging for pharma and healthcare. In South America, we successfully We are building a new production facility for plastic packaging in the West of India. Our new plant For medical devices in Skopje North Macedonia is steadily ramping up. Within the global expansion, we are also setting up local capabilities, regional innovation centers are bundling the local competencies into a worldwide network. We expand and grow our global network of competences and innovation centers, adding to the existing centers like smart device center in Alton and Our competence center in China, it is the new glass innovation technology center in Vineland that Opened in the U. S. In 2019. On top of that, we decided to install another center for molded glass in Loa in 2021. India and China are further extensions that are planned in the outer years. Gannesheimer has a strong focus on new Innovational Products, we see 2 core segments, high value products and Smart digital solution. Moving up the value chain, the first group, yes, examples like Elite And ready to fill products are already well known to you. We integrate production steps from our customers, which are Our product solutions of the future are becoming Smarter, more digital with connected solutions. Our micro pump are clearly one of these products, but we have extended medication and individual medicines. It supports relevant topics as compliance, correct application and High value solutions are key growth drivers. But already in 2021, we see them contributing to our growth. This, Plus the growth in our underlying mature markets and our global expansion is the base for Our guidance for 2021 mid single digit growth. With this, I hand Over to Bernd to lead us through some of the financials. Thank you. Thank you, Dietmar, and welcome to 2020 even in a difficult market environment. In our core business, we achieved revenue growth of 3 8%. To put it in perspective, this level of growth was not reached in the Last 5 years, and we accomplished it despite headwinds from COVID-nineteen, as you know. Now let's dive into the P Analysis of Q4. Reported revenues in Q4 2020 came in at EUR 403,000,000. This includes a negative currency impact amounting to approximately €12,000,000 Organically, we Turning to the earnings. We achieved a strong adjusted EBITDA of €100,000,000 reflecting an The one off costs in Q4 2020 increased by Approximately EUR 2,000,000 This increase is mainly related to our COVID-nineteen bonus accrual for all our by the impairment at Zenzil in 2019 and related tax impacts. Depreciation and Amortization dropped by €119,000,000 to €40,000,000 in Q4 2020. Last For 2020 amounted to €19,000,000 translating into a tax rate of around 38%. This The adjusted net income surged almost 50% to EUR 42,000,000 in With the development in our core business during Q4, plastic and devices. This division grew organically 6.0 percent in Q4. The negative currency effects, mainly from U. S. Dollar and Brazilian We saw significant revenue contribution in Medical Plastic Systems and our Syringes business. Both businesses The adjusted EBITDA increased to €73,000,000 which leads to a margin of 33.3 percent. The P and D division had a positive impact of €1,000,000 due to the first time application of 16. Adjusted for this and FX effects, the EBITDA margin would have amounted to 32.2 percent, so Growth in the mid teens percentage range. This included 1st significant sales contributions from high value Solutions such as the lead glass and also from the first supply of injection vials for COVID-nineteen In addition, in Q4, cosmetic revenues attained prior year's level, which shows that cosmetic can Recover quickly once the lockdowns are somewhat lifted, as this was the case in September, October The effects mainly from the U. S. Dollar impacted the reported revenues by a low mid single digit €1,000,000 amount. The adjusted EBITDA And benefited from settlement agreements with regards to the cancellation of projects in the Sensile business last 1st year 2019. The impact from the settlements led to a positive revenue contribution of €5,000,000 With regards to the adjusted EBITDA, it was overall neutral. The underlying performance in Q4 was in line Our revenue model, instead of getting reimbursed for the development costs from pharmaco, we prefer to get a higher In other words, since 2019, we of our marked MicroPump for chronic heart failure treatment with SQNOVATION is on track with first sales contribution expected from 20 22 onwards. In addition to our strong revenue and adjusted EBITDA performance in Q4 2020, I would like to highlight our free cash flow contribution of Supported by excellent earnings quality and the reduction of our net working capital by €45,000,000 Worth noting, we to forego expensive cash discount agreements in the magnitude of €10,000,000 to €15,000,000 and replaced it with much The position others includes a positive impact from hedging. The change of €11,000,000 compared to previous year is, however, mainly linked to the noncash The derecognition of contingent purchase price liabilities with regard to the acquisition of Senzai in the amount of €11,000,000 in 2019, which was severely impacted by non recurring extraordinary items in It, in my view, reflects more adequately the underlying performance of the group in 2020 due to the distortions A growth of 1.7% for the group and 7.9% in the core business was somewhat better than As a result, the adjusted EBITDA margin increased by 80 basis points to almost 22% and €224,000,000 and declined slightly by 4% compared to the underlying figure In Q4, we reduced our net financial debt to 9.23 €1,000,000 This resulted in an improved financial leverage of around 3.0x compared to 3.2x This covenant gives us solid financial headroom and will remain in place until mid-twenty 2020. We have not only reduced our financial leverage, but we also managed to improve our On October 1, 2020, we signed a promissory loan agreement amounting to €325,000,000 This issuance was significantly oversubscribed by 3 to 4 times, which reflects Without doubt, given the global COVID-nineteen pandemic, the fiscal year 20 The key takeaways from a financial point of view for 2020, five topics come to my mind. First of all, We proved to have a very robust business. We managed to meet our initially set guidance range despite COVID-nineteen, which also underlines our high forecast accuracy. No doubt, business, but we managed to deliver. 2nd, it's worth highlighting that we accomplished to secure a financing in April 2020 in the middle of the storm and uncertainties of the COVID-nineteen This demonstrates the high level of confidence of the credit market in our business model. 3rd, in amounting to EUR 325,000,000 Our issuance had been 3 to 4x oversubscribed as we We held our virtual Capital Markets Day where we presented our new transformative Garesheimer. There, we elaborated Our growth strategy, as Dietmar already mentioned, we also introduced our new guidance, which is now Even more focused on our core business was a particular emphasis on revenue growth. The new guidance KPI Earnings per share is a consequent development of our strategy implementation, which will be reflected in an increasing shareholder Thank you, It's always a tremendous amount of figures you are delivering. So let's move this up a little bit. Yes, ladies and gentlemen, we are Forming out of Gennesheimer, the change into the future is fully present. We set very ambitious goals, And delivery continuously and reliable. From 2022 on, we plan to bring the company into high single digit revenue growth levels. We have started our growth engine. Gannesheimer is The focus for 2021. The key message And focus for 2021 in a few words. First, we will deliver according to plan. COVID-nineteen It's not over yet and we will still see COVID-nineteen effects throughout 2021. We The cosmetic business will We'll not fully recover until global lockdowns are easing, but we expect that the supplies of COVID-nineteen vials will point to me, we will maintain or even accelerate the dynamic in the company, the drive and also the momentum. We push Gary And back to Carolyn, and I'm looking forward to your questions. Thank you. Thank you for And the first question comes from Scott Bardo, Berenberg. Please go ahead, Thanks, Lauren. Good afternoon. Yes, few questions, please. So in fiscal 2020, I think You achieved just a tad below the below end of your 3% to 7% mid single digit growth range. As you guide for 2021 for a similar range, can you help us understand a little bit What needs to happen to reach either end of those ranges? Which end of that range you think is more likely in fiscal 2021? And I guess following on from that, is your EBITDA margin progression in 2021 purely growth dependent? Or are there some other Because they're between the 2022 2023 percent range you highlight. Second question, please. Dietmar, I wonder if you could give us a bit of an update please on the progress of your Czechoslovakian facility For your new asthma inhalation device in Europe and also help us understand the build out of your ready to fill syringe capacities and how committed they are by customers currently? Thank you. Yes, thank you. Scott, I have to sort the questions a little bit. Yes, the guidance, no doubt, 2020, As I said in my presentation, our goal was to hit the guidance just in the center of the The cosmetic effect, we took a certain hit and with the corrections, We hit the lower bandwidth, which is a fact. In 2021, there's no doubt, we are clearly aiming at least for the middle of the center of the guidance Again, here there are various effects again. Yes, the COVID is still present. The cosmetic is But on the other side, we will have more tailwind coming with the COVID virus and that will support us. That gives us evidence into To the year end, as we are not before the year, it's actually already in the at least I don't know whether you want to say something, Bernd. Basically, Scott, to take this question regarding the margin. I mean, it's under the assumption that we Under the assumption that we said we go really in the middle of the mid single digit growth, as Dietmar mentioned, and it's really somehow balanced risk and opportunities view, Then we should also be in the middle of the 22% to 23% range. Why we are a little bit careful on this topic is regarding the EBITDA margin because we don't know exactly how the energy prices are developing into the year and therefore a little bit better to be on the safe side. Therefore, we want to have a little bit bigger room on this topic. But all in all, we are cooler than last year, honestly spoken, as a matter To the second question, Skopje. Skopje has certain delays, maybe 3, some of the areas even 6 months. Why is this? Because Some of the machines in some of the machines could not be delivered due to COVID, which is in the end, we should Forget this sales neutral because we are here talking about relocations from Freinds that are Taking place a little bit later than expected and as and this is actually pretty neutral, has no sales To the syringe expectations, as we always said, we are ramping up the production In Bunde, at present, the ready to fill line is installed and is Ramping up since mid of 2020, the RTF6 is supposed to come into place beginning of Volumes will definitely be used. So what you said, how much is covered from your customers. So this is not our problem. So I would have been able to sell significantly more syringes in 2020 as 'nineteen if I would have had the capacity and this will not change In 2021. I hope this answers your questions. Very good. Thank you. I'll jump back in the queue. Next question comes from Doctor. Daniel Griegard from Stifel. Please Good afternoon. Thank you for taking my question. I would just like to Back to the question on the full year 2021 guidance and I would ask you, could you please be more specific on the dynamic Through the quarters that you expect for 2021. So for instance, in particular in Q1, you have a rather Soft base with the center adjustments, for instance, you had last year. On the There was no COVID effect. And obviously, in the second half, you have a rather higher base. So that would be To get more color on that. And secondly, please a question on Senza, in particular on SQ Your innovation, what is the status there? And how confident do you feel about this project? Thank you very much. Thanks a lot. Daniel, I'll take your first question regarding how we basically started now into Q1 and looking also at the first half of the year And how is our expectation? In the end, we really started good into the year. But as you know, we And we said we guided for the full year mid single digit growth, and this is something what you could Basically, I can confirm our guidance. And under this perspective, you started pretty good under the year, but you need to know that we have a certain correlation Always this the lockdown. So what we see is Q2, Q3 last year, just to remind ourselves, When the severity of the lockdown was high, also our cosmetic business was impacted into something what we see as well in Q1. Nevertheless, we had a good start into this year, and we will present the numbers in April in 2 months I will probably take the Sensile questions, the SQ Innovation. I think you were referring to the project SQ Yes, the project is now running. Actually, the clinical studies are ongoing right now, which is What takes place at the moment? We have plans to see first sales in 2020 And at the moment, the project is in track. We don't I don't see a reason why at the moment this wouldn't come. So we are setting up production capabilities At sub suppliers partly, and I'm still optimistic that we will see the first sales in 2022. Now we have Daniel Wendel from Commerzbank. Hi, Daniel. Hi, and thanks for taking my questions. 2, if I may. The first one is actually Referring to your Slide 13 in your presentation, can you maybe shed a bit more light on the revenue You expect to come from high value solutions in 2021. What are they? And what products in your view have the highest Potential also to help achieve high single digit growth as of 2022? That is my first question. And the second one is on The vials being sold to corona vaccine manufacturers, can you update us again on the overall amount you We would expect to ship during 2021. Thank you. Yes. Ben, do you want to elaborate it because it's your favorite question, The first one, I take the second one with the Just to take up, Daniel, hope I covered your question in an appropriate way. Basically, you're Asking where is the High Value Solutions as this kind of growth is coming from. Again, we said around 2 to 3 percentage points. And if you look at It's actually innovation in the area of biologicals, I have to say. We really start Getting traction for Elite products, we have seen this already in Q4 with a contribution of €4,000,000 As mentioned, RTF, Litter RTF files, other contributions, especially also RTF COP syringes are benefiting. Obviously, Also the biological vials is something where we really see a growth compared to 20.20 of Around €15,000,000 set up basically the key elements where this kind of product growth is actually coming from. Yes. Then I take the second one, which is probably referring to the COVID vials. We have added capacity in the last, let it be some 18 months Of around 500,000,000 units a year, that fits very well into our plannings because we are still referring to this €1,000,000,000 of vials We already spoke about that we believe we will ship in the next 2 years. That fits to the 500,000. We have started some shipments already now in the Q4 not too much, but we have started to ship them and we have to see how this distributes over time, but we are still Expecting this in the ballpark of 500,000 units a year in the COVID vials. It's quite interesting and it's highly dynamic. You clearly see that at the moment there's out of a sudden a discussion of a second vaccination that you need to order to protect yourself. Maybe there's a virus And the mutation of the virus is interesting and it might require secondary Or even an annual or biannual vaccination. This is something we are monitoring closely and then react as we Are there Any further questions in the line? We have a follow-up from Scott Bardo. Please go ahead, Scott. Yes, thanks. Just a couple of small clarification questions, please. Probably A little bit more oriented at you, Ben. So I think in the fiscal 2020, you had Some €12,000,000 in insurance compensation for your warehouses and furnaces and so forth. And I just want to understand, did this in any way benefit your margin for 2020? And what would be sort of a Clean number of your margin for 2020, perhaps help us understand the mechanistic of How that washes out in 2021? That would be helpful, please. And the second question, and I appreciate that The group has a broader ambitions to scale up and to prepare for accelerated growth. The CapEx in the Q4 a little bit soft. Can you help us understand where you are with your CapEx Build out and ongoing plans to optimize free cash flow generation. Thank you. Scott, I would take your first question, maybe then regarding these insurance payments. It's quite Equal to give you a very robust number given the complexity. But in the end, if I would make the calculation, I would assume €5,000,000 would be something I would put into my actual spreadsheet as a support For my margin, having this said, you should know that we get this compensation for incurred losses in the end of the day in our And actually, we lost revenues. And 2 third of this lost revenues, what we could demonstrate, It was compensated. So therefore, I think in this sense and also what we also need to be aware of, Due to this furnace leakage at that time, we had a lot of costs associated with it, quality costs, fixed Costs which were we couldn't use this capacity and so on and so forth, so dilution there. And all in all, I would basically assume maybe you have a positive bottom line effect, maybe €4,000,000,000 5,000,000 something like this, but it's really an estimate. I hope I can be helpful could be helpful for you. That's helpful. Thank you. Yes. I take the CapEx question, Scott. Yes. I wouldn't over evaluate this couple of 1,000,000 In the end of the year, I wouldn't say that soft CapEx. There's a couple of investments that shifted over from 2020 into 2021. It's not a surprise. You heard me earlier discuss About some of the machines that have come in later for Skopje, for example, that is not a surprise because in the COVID time, none of the The machine makers can come in. They can't install the machine, so there are some certain delays in. There's a big one we should not forget. We postponed the furnace renewal of the lower facility from 2020 into 2021. And this is actually ongoing In spite of COVID now, as we talk at the moment, building up the new furnace, and this is some of the delays. For 2020 1, it's not a surprise. You have the classic area of growth that are where we for the CapEx, you have some additional CapEx And you have some bigger portion for one side the device the syringe Strategy and some big orders we brought in last year for devices that will start to invest because it needs and requires extension That does indeed. Thank you. And maybe just one bigger picture follow-up, if I may. I think you outlined at your capital markets event in December And the successful win of a new OEM auto injector contract, which I think is a nice addition to your customer set in this area. Can you help us understand whether you believe Geraschheimer is more of an attractive So, that's sort of business than it was before and whether more of this sort of business can come and maybe actually going further. Is it this sort of business that you want as a direction for the growth of the business? Or are you more trying to prioritize your own innovative products? It is definitely a business that we want, Scott. It's not the only business we want. There's a couple of other businesses as well. But it's Definitely the business that we want. It's the big orders. There's no doubt We are increasingly attractive to our customers. We recognized a clear win of reputation with our strategy on the one Sustainability, customer focus innovation, but also a certain tailwind, we should not ignore this, that we receive With our reliable deliveries in the COVID times where the access we have into the top management layers of some of the customers has significantly improved actually. And Simply improved actually. And that makes quite the difference. And I think Bernd is eager to say something as Scott, what is also it's really also financially attractive, this contract manufacturing agreements that we have. And we are always Calculating obviously an appropriate Yara. As you know, our hurdle is 15%. And for this particular project we Just mentioned the Capital Markets Day, it was almost 20% year round and this comes as relatively risk free, if you want. So, conceptually, you have here and there take or So it's a very attractive business also from the pure financial and financial risk management And I clearly to add this, I clearly see We have become a different layer of partner with the push on innovations, Attractive partner with concentration of competence on our side and that really helps and we are and hopefully I'm able To talk about this over the loop of the next month on the way to the next contract in that ballpark. Very good. Thank you. Now we have a follow-up from Daniel Wendorff from Commerzbank. Yes. Thanks for My follow ups, 2 if I may. 1 is potentially relating also to the last topic. You highlighted that in Q4 in your Plastics division, Performed so well or maybe it was a group of products? And second question is on Centaur. Where are you with your plans Or maybe expanding the business model also beyond the North American market? Thank you. Yes. The first one is relatively easy. The very strong drivers we saw in the medical device areas are coming from the syringes on the one side, which It's also not a total surprise because you heard it earlier, the ready to fill Line 5 is steadily contributing now into the sales and that led to double digit growth And the next one is also not a total surprise. We always spoke about the extension we do in With the European inhaler, which is actually, I think I can say it, one of the key customers, British pharma company. And as this will be launched this SOP in June, I think the steadily contribution of this inhaler helped us here also to deliver significant The contribution of this inhaler helped us here also to deliver significant strength. For Center, actually, we never had the intention To internationalize or globalize the business, we see certain potentials to grow the business, bring this from a relatively clearly flattish behavior into certain And that's definitely something we are working on and we see the potentials. It's too early, honestly spoken, that I'm able to talk And now we Thomas Schisler from Equity. Thank you for taking my question. Actually, it's on sustainability, if I may. What is your view on green hydrogen as an energy for your furnaces? And are you already in some Teeper discussions within those groups of developing those new energy sources. Thank you. The brutal fast and quick answer is yes, very interesting to yes, we are Seriously thinking about this and looking into this. Additional question. What is The time frame of implementing those new energy sources, in your opinion? It's no doubt At the moment, the firmness replacement in Loa is ongoing at the moment. So it's only present for the next one. But the next facilities That will come in the following years is actually TETOR and Montminier, where it fits very, very nicely because that's the cosmetic facilities where we anyhow We are at the moment seriously looking into how far is technology, what can we make, What is feasible and what is the best way to upgrade your furnaces And your ovens in direction of sustainability and the technology you just mentioned is definitely something that is highly interesting. Thank you. Thank you. As there are no further questions, we would like to thank you for Thank you. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.